Corporate Finance (8%) Flashcards
WACC
wd[kd(1-t)] + wpskps + wcekce
w(after tax cost of debt) + w(cost of preferred stock) +
w(cost of common equity)
After Tax Cost of Debt
kd
kd(1 - t)
Market interest rate (YTM) at which firms can issue new debt (kd) net of the tax savings.
Cost of Preferred Stock
kps
D
———
P
Cost of Common Equity
kce
CAPM Model
[E(rmkt) - rrf]ß + rrf
Cost of Common Equity
kce
Dividend Discount Model
kce = (D1 / P) + g
or
P = D1 / (kce - g)
Growth Rate
g
RR * ROE
(1-dividend payout)*ROE
Retention Rate
RR
1 - Payout Rate
Profitability Index
PI
- NPV / CF0 + 1
- If PI>1 accept project
- If PI<1 reject project
- Remember NPV calc is for future cash flows only.
Break Point for
Marginal Cost of Capital
MCC
$ Amount of Debt or Equity at the Change
——————————————————————
Weight of Debt or Equity
Bank Discount Yield
BDY
[(par - purchase) / par] *(360/n)
Cost of Trade Credit
(Payables with discounts)
(1 + %Disc/(1 - %Disc)(365/n) - 1
The cost of not paying based on discount terms
eg:2/10 net 40
Money Market Yield
rmm
(F / P)%Discount
Operating Cycle
DOP + DOH
What is an A/R aging used for?
- identify trends in how well the firm is doing at collecting receivables and turning them into cash.
Cost of Common Equity
kce
Bond-Yield-Plus-Risk-Premium Approach
kdbt + Risk Premium
or
[kd/(1 - t)] + Risk Premium
Before tax cost of debt plus risk premium of equity over debt.
What is the purpose of the audit commitee?
- ensures that financial info provided to shareholders is complete, accurate, reliable, relevant, and timely.
- make sure no management influence.
- conflicts btwn external auditor and firm resolved in manner that benefits shareholders.
- commitee are financial experts
*
What is the purpose of the renumeration/compensation commitee?
should be independent board members that set executive compensation, commesurate with responsibilities and performance.
*
purpose of nominations commitee?
they recruit qualified board members.
*
Cash Flow Forecasting Techniques
Short Term
- Simple Projections
Medium Term
- Project Models & Averages
Long Term
- Statistical Models
Degree of Total Leverage
DTL
(Revenue - Variable Costs)
——————————————
Net Income
What is a poison pill
way a company can dilute shares to prevent a hostile takeover.
Optimal Capital Budget
The amount of new capital required to undertake all investment projects with an IRR greater than the MCC.
MCC = IOS
The point where the Marginal Cost of Capital (MCC) intersects the Investment Opportunity Schedule (IOS)
The amount of new capital required to undertake all investment projects with an IRR greater than the MCC.
MCC = IOS
The point where the Marginal Cost of Capital (MCC) intersects the Investment Opportunity Schedule (IOS)
Optimal Capital Budget
Business Risk
Sales Risk + Operating Risk
Asset Beta
ßAsset
ßEQ
——————————
1 + (1 - t)(D/E Ratio)
Equity Beta
ßEquity
ßAsset*[1 + (1 - t)(D/E Ratio)]
degree of operating leverage?
DOL =
REV - Variable operating costs
REV- variable operating - fixed operating
net income
EBT (1-tax rate)
Degree of Operating Leverage
DOL
Q * Contribution
—————————————
Q * Contribution - Fixed
country equity premium?
sovereign yield spread * annualized standard dev of equity index/annualized stadard dev of sovereign bond
